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Market Update

EncoreFX’s daily market updates are written by our experienced and professional dealing team.

All Eyes on Yellen as USDCAD in Lock Down Ahead of Speech

Published August 26, 2016
  • USDCAD continues its exhilarating sideways chop in a tight range around the 1.2900 handle ahead of a key speech by Fed Chair Janet Yellen at 10am ET
  • Will she continue to the relatively hawkish tone delivered by her colleagues of late? Or will she deliver a more balanced tone aimed at maintaining the Fed's neutrality and data dependence?
  • The title of her speech is "The Federal Reserve’s Monetary Policy Toolkit” and the theme is likely to touch on how the Fed will be able to counterbalance a recession amid a period of unprecedented low interest rates
  • Historically, the Fed has cut rates by an average of 550 bps during recessions in order to fuel lending and cushion the blow
  • With rates in the long term expected to stay closer to 3 – 3.5% there is much less room for them to support the economy with rate cuts and so unconventional tools such as forward guidance (when they would cut/hike rates) and quantitative easing (printing money to buy assets) come into play as viable long term options which the Fed will have to deploy going forward
  • These points are likely to be touched upon this morning by Janet Yellen; we are also hoping that she gives some guidance on the near term rate path
  • A hike before the US election in November seems improbable, however a hike in December may be more plausible
  • This morning, the US reported that Q2 GDP was revised down to 1.1% from 1.2% as expected 
  • However, the Fed's favoured inflation metric, Core PCE Prices, rose to 1.8% from 1.7%, a positive sign
  • As well, a large draw down on inventories in Q2 is estimated to have accounted for shaving 1.26% points of GDP; this could be an indicator of stronger consumer demand which accounts for roughly two thirds of US output
  • Yellen speaks at 10am ET which coincides with August's final Consumer Sentiment Index from the U of Michigan, so we could some out sized moves across FX markets this morning
  • Oil is flat on the day at $47.45 a barrel and equities in the US and Canada are expected to open flat but that could change quickly once Yellen's speech hits the tape

Charts: (1) USDCAD back to range trading as uptrend broken – need to get above 1.2930 short term and 1.3000 medium term for bulls to take over. (2) Economic Calendar is dominated by the US this week.